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China to slash taxes, boost lending to prop up slowing economy

Government is targeting economic growth of 6.0 to 6.5% in 2019

Tue, Mar 5, 2019, 07:33

Chinese paramilitary police officers patrol outside Great Hall of the People before the opening of the second session of the 13th National People’s Congress in Beijing. Photograph: How Hwee Young/EPA

China sought to shore up its slowing economy through billions of euro in planned tax cuts and infrastructure spending, with economic growth at its weakest in almost 30 years due to weaker domestic demand and a trade war with the United States.

The government is targeting economic growth of 6.0 to 6.5 per cent in 2019, Premier Li Keqiang said at Tuesday’s opening of the annual meeting of China’s parliament, less than the 6.6 per cent gross domestic product growth reported last year.

Sources told Reuters earlier this year that China would cut its 2019 growth target to 6.0 to 6.5 per cent from the 2018 target of around 6.5 per cent as both global and domestic demand ebbed and the US trade war heightened economic risks.

Speaking in Beijing’s Great Hall of the People, Mr Li warned of the challenges the world’s second-largest economy faced and pledged to keep it on a safe footing with an array of stimulus measures.

“The environment facing China’s development this year is more complicated and more severe,” he said. “There will be more risks and challenges that are either predictable or unpredictable and we must be fully prepared for a tough battle.”

Mr Li said China’s fiscal policy would become “more forceful”, with planned cuts of nearly 2 trillion yuan (€263.5 billion) in taxes and fees for companies.

Those tax cuts are more aggressive than the 1.3 trillion yuan delivered in 2018 and include reductions aimed at supporting the manufacturing, transport and construction sectors.

China’s GDP last year expanded at its slowest pace since 1990 due to the trade war and Beijing’s crackdown on financial risks, which raised corporate borrowing costs and hurt investment.

Analysts say Beijing’s move to adopt a GDP target range, rather than a single growth figure, gives policymakers room to manoeuvre. But the increase in planned fiscal stimulus marks an explicit acknowledgement that authorities remain concerned about growth.

“If you are not sick you will not take so many medicines at one time,” said Iris Pang, Greater China Economist at ING Wholesale Banking. “It means the headwinds have not gone away, they are still there.”

China has ramped up the propaganda in the run-up to parliament, with state media releasing English-language videos and even a rap song praising the event as an exercise in Chinese democracy, though the legislature never rejects laws and its members are chosen for their loyalty to the Communist Party.

The annual gathering in the capital includes more than 3,000 delegates, who come from all over China, with ethnic minorities showing up in colourful traditional outfits.

Infrastructure investment

To support growth, Mr Li said China would closely monitor employment at exporting companies heavily exposed to the US market and cut the value-added tax (VAT) for the manufacturing sector to 13 per cent from 16 per cent. VAT for the transport and construction sectors will be cut to 9 per cent from 10 per cent.

China aims to create more than 11 million new urban jobs this year and keep the urban unemployment rate within 4.5 per cent, in line with its 2018 goals. At the same time, it will cut the social security fees paid by companies.

In a push to ramp up infrastructure investment, China’s finance ministry raised the special bond issuance quota for local governments to 2.15 trillion yuan from 1.35 trillion yuan last year.

The lower tax revenue and higher government spending push China’s budget deficit target for this year up to 2.8 per cent of GDP from last year’s 2.6 per cent.

The government has also set a consumer inflation target of around 3 percent despite a recent softening in price rises to less than 2 per cent, which gives Beijing some room to stimulate consumption.

Over the past year, China’s central bank has cut the reserve requirements for commercial lenders five times to spur loans to small and private companies - vital for growth and jobs.

Mr Li said on Tuesday monetary policy would be “neither too tight nor too loose” and that the government would not resort to a flood of liquidity. Growth targets for M2 money supply, which includes cash in circulation and deposits, and total social financing this year would be in line with nominal GDP growth.

To support private and smaller firms, Li said Beijing will step up targeted cuts in the reserve requirement ratio for smaller and medium-sized banks with an aim to boost lending to small companies by large banks by more than 30 per cent.

Trade risks

Addressing one of the biggest challenges China’s economy faces, the government’s work report to parliament said it would continue to promote Sino-US trade negotiations and was committed to safeguarding economic globalisation and free trade.

Separately, China’s top banking regulator said on Tuesday Beijing could “absolutely” reach an agreement with the United States on opening up its financial sector, even as the country’s commerce minister admitted talks with Washington had been difficult.

In recent weeks, the United States and China appear to have moved closer to a trade deal that would roll back US tariffs on at least $200 billion worth of Chinese goods.

US Secretary of State Mike Pompeo said on Monday he thought both nations were “on the cusp” of a deal to end their trade war. – Reuters